Teaching Your Teen How to Budget

Time To Read 3 MIN READ

Whether you give your children an allowance, make them do chores for what they get, or have them earn their spending money from paying jobs, kids need to know how to budget what they have. Instilling good financial skills while your kids are still relatively young can be one of the most important life lessons you pass along to your teens.

Forcing your teenagers to control their spending helps them learn to budget.

Set a Good Example for Your Teens

Your kids pick up many of their financial skills and habits -- good and bad -- from you. According to Alan Moore, a certified financial planner practicing in Milwaukee, Wisconsin, "Practicing 'do as I say, not as I do' is not effective." Instead, he says "The most important thing is for parents to develop and practice good financial habits, and teens will pick up on them. Parents should get their own financial house in order if they want to teach their teen good financial habits." Look for opportunities to explain how and why you're spending (or not spending) your money.

Involve Your Teen in Spending Decisions

Including your teen in conversations about how to spend household money rather than simply making the decisions yourself gives your teens real life experience in making financial decisions. Moore asks, "Why not ask the teen to decide between the cost of a rec league sport or a new cell phone? By giving them control, it teaches them the value of money and the tradeoffs that have to be made." Of course, it doesn't have to be limited to sports or cell phones: find expenses that are relevant to your teens to help them learn the value of financial planning.

Force Your Teen to Budget

Though it can be scary at first, turning over financial responsibility for paying certain bills can help your teen understand the importance of making a budget and sticking to it. "I recommend parents add up the cost of auto insurance, gas, auto repairs, clothes, entertainment, meals out, date money, etc... basically all of the money they give their teen each month," Moore says. "Then, on the 1st of the month, write your teen a check for this amount with the understanding that they won't get any additional money until the next month." If the end of the month rolls around and your teen doesn't have money left over, he'll learn to stick to his budget the next month. Moore advises parents to help their teens "budget the first couple of months, track their spending, and be available to ask questions." If your teen might have a hard time making it an entire month, consider disbursing smaller amounts in shorter intervals and building from there.

Consider Future Savings

It's also never too early to think about retirement savings. According to Moore, "You have to have earned income to contribute to a retirement account, so if they have a part-time job they can contribute up to 100 percent of their wages into a Roth IRA. For instance, if they make $3,000 working at a summer camp, they can put up to $3,000 into an IRA. If they only put in $1,000, parents could offer to match funds to teach the value of 401(k) matching, just as long as no more than their earnings goes into the account." Roth IRAs offer a particularly good value for most teens because even though there's no tax deduction for contributions (and most teens wouldn't benefit much, if at all, from a deduction anyway), the money grows tax free and all of it -- including earnings -- comes out tax-free at retirement.